The January Jump in Personal Income

By at 26 February, 2021, 10:58 am

by Raymond J. Keating-

The headline from the latest report on personal income from the U.S. Bureau of Economic Analysis certainly grabs one’s attention. After all, a 10 percent leap in personal income in January 2021 does rank as the second highest increase on record.

Even more dramatic, real disposable personal income (i.e., personal income less personal current taxes) rose by 11.4 percent in January.

The Wall Street Journal’s account of the report declared that this increase in personal income, along with a 2.4 percent rise in consumer spending, were “priming the economy for a burst in growth this year.” Well, let’s certainly hope so. But there are reasons to keep our excitement in check.

This dramatic increase in personal income is all about government transfer payments. As noted in the BEA report: “The estimate for January personal income and outlays was impacted by the continued federal response to the spread of COVID-19. Economic impact payments and increased unemployment insurance benefits were distributed as a result of the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act, which was enacted on December 27, 2020.”

Government aid is not a driver of economic growth. At best, it can help individuals stay afloat during tough times. After all, those dollars are being redirected from other individuals and undertakings. There are obvious and considerable costs to such governmental efforts. For good measure, the recipients of such aid understand that these are troubled times, and generally do not wind up spending the bulk of such dollars, contrary to the Keynesian economic assumptions underlying such aid efforts. In the end, whatever positive effects that might come from governmental payments, they are temporary – very short term.

Meanwhile, to get a better feel for the underlying state of the economy from the personal income report, we need to look at what’s happening in the private sector. Here, the January numbers were not encouraging.

For example, private sector wages and salaries increased by 0.8 percent in January. Not bad in normal times, but a mere fraction of January’s overall change.

Decline in Small Business Income

Deeply troubling, though, was the fact that proprietors’ income – that is, small business income – declined in January by 0.5 percent. And that was the third month in a row of declines. As noted in the following chart, proprietors’ income with inventory valuation and capital consumption adjustments (seasonally adjusted annual rate) in January 2021 actually came in below its pre-pandemic level.

While during a pandemic and governmental shutdowns, one can argue that governmental aid is justified. The assumption that such aid will somehow translate into a stable recovery and strong economic growth is misguided. Recovery and solid growth clearly depend upon vaccines being distributed, getting this pandemic under control and behind us, a return to normalcy in life, and entrepreneurs, businesses and investors being able to build, rebuild, invest, innovate, and create jobs.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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